Aluminium futures on the Multi Commodity Exchange (MCX), which confirmed an inverted Head and Shoulder (H&S) pattern by breaking out of resistance at ₹218 early this year, has failed to extend its rally. The contract has fallen against resistance at ₹228 over the past few weeks.
However, last week, the February futures touched a rising trendline support at ₹208 and rebounded. It is currently hovering around ₹214. The trendline is a strong support and the contract has been making higher highs and lows since October last year. Thus, we expect the support at ₹208 to be the next higher base upon which aluminium futures could build an uptrend. The inverted H&S pattern indicates a potential rally to ₹250.
But a breach of the above mentioned trendline support can turn the outlook negative. Therefore, traders need to keep a close watch.
Trade strategy
Since the trendline support is likely to stay true and the risk-reward ratio is favourable, we suggest going long.
Buy now at around ₹214, with an initial stop-loss at ₹205. Move the stop-loss up to ₹210 when the contract rallies above ₹218. Thereafter, when the contract breaks out of ₹228, alter the stop-loss to ₹220.
Tighten the stop-loss further to ₹232 when the contract touches ₹240. Exit the longs at ₹245.
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